a16z: After the GENIUS Act, there is an urgent need for the CLARITY Act.

Author: Miles Jennings, General Counsel of a16z crypto; Translated by: AIMan@Golden Finance

The House of Representatives recently advanced an important new "market structure" bill with an overwhelming majority (294 votes in favor, 134 votes against, including 78 Democrats supporting).

The bill known as the "Digital Asset Market Clarity Act" (HR 3633) will establish a clear regulatory framework for the digital asset market. This bill has currently been submitted to the Senate for review, and the Senate is drafting its own version of market structure legislation, which will reference the CLARITY Act.

If the bill is passed, it will establish clear rules for blockchain systems—putting an end to the uncertainty that has stifled innovation, harmed consumer interests, and favored unscrupulous merchants who adhere to non-transparent principles over entrepreneurs who pursue transparency for many years. Just as the Securities Act of 1933 established investor protection mechanisms and promoted capital formation in the United States for nearly a century, the CLARITY Act could become a profoundly influential piece of legislation.

When our legal framework can both promote innovation and protect consumers, the United States can lead the way, and the whole world can benefit. The CLARITY Act is such an opportunity. This legislation builds on the bipartisan cooperation of last year's FIT21 Act, but the CLARITY Act improves upon it in several key ways, which we will outline below: covering what innovators need to know and why this bill is crucial for harmonizing innovation, consumer protection, and U.S. national security.

With the recently signed "GENIUS Act" (which will be detailed below), the need for a broader market structure legislation has become more urgent.

Why the CLARITY Act is Important

Although the cryptocurrency industry has existed for more than a decade, the United States has yet to establish a comprehensive regulatory framework. However, cryptocurrency is no longer just a trend among tech insiders; it has become infrastructure: blockchain systems have now become the foundation for various fields such as payment systems (including through stablecoins), cloud infrastructure, digital markets, and more.

But the construction of these protocols and applications lacks clear rules. What is the result? Legitimate entrepreneurs face the impact of regulation, while unscrupulous traders profit from the ambiguity of the law. The passage of the CLARITY Act will reverse this situation.

By providing a transparent compliance pathway for projects and ensuring that regulators have better tools to oversee actual risks, the CLARITY Act (along with the stablecoin legislation known as the "GENIUS Act") will bring the already vast cryptocurrency industry out of the shadows and into a regulated economic system. This new legislation creates a framework for responsible innovation, much like the foundational laws of the 20th century that helped public markets prosper and protected consumers.

In addition to providing a clear compliance pathway, the bill also offers clearer rules – granting entrepreneurs the legal certainty needed to innovate confidently and operate domestically. This will ultimately alleviate the pressure on legitimate entrepreneurs to start businesses overseas (or to use inefficient and opaque structures to evade regulation).

This legal clarity will open doors for the next generation of decentralized infrastructure, financial instruments, and user-owned applications—all of which will be built in the United States. Ensuring that blockchain systems are developed in the U.S. will also protect global digital and financial infrastructure from dependence on blockchain systems created and controlled by countries like China, while also ensuring that U.S. regulatory standards apply to the core financial infrastructure increasingly used by people beyond just cryptocurrencies today.

What will the CLARITY Act do?

Establishing a clear regulatory path for digital goods ###.

The "CLARITY Act" creates a regulatory framework for digital assets (referred to as "digital commodities"), granting users ownership of the blockchain system.

The bill allows blockchain projects to launch digital goods and enter the public market based on a maturity framework of control, without bearing excessive regulatory burdens or uncertainties.

Implement supervision over blockchain-based intermediaries

The bill ensures that centralized participants in the cryptocurrency space (such as exchanges, brokers, and dealers) are subject to strict regulation. These intermediaries include:

• Need to register with the CFTC; and
• Comply with and manage compliance standards similar to those of traditional financial institutions.

These requirements enhance the transparency of core market infrastructure, helping to prevent fraud and abuse, and increasing consumer trust. They also address the current regulatory gaps that allow companies like FTX to operate in the U.S. market without constraints.

protects consumers with strong safeguards while promoting innovation.

The "CLARITY Act" also establishes direct consumer protection measures, including:

• Mandatory Disclosure Obligations of Digital Commodity Issuers — Ensuring that retail investors can access basic, important information;
• Restrict Insider Trading — Limit the ability of early stakeholders to harm user interests through information asymmetry.

These measures also provide a clearer roadmap for entrepreneurs to build decentralized blockchain systems, helping to foster innovation.

Which government agency is responsible for regulation?

The "CLARITY Act" will provide a clear and structured pathway for the transition of digital assets from the SEC to the Commodity Futures Trading Commission (CFTC).

Let's compare how current laws and the CLARITY Act (if passed) address the unique characteristics of blockchain systems:

The above approach is based on a carefully calibrated "control-based" risk framework; the details will be elaborated below.

How does the "control-based" maturity framework of blockchain systems work?

Compared to the traditional effort-based decentralized test created by the SEC in the United States in 2019 (which has an unclear definition of decentralization that regulators can exploit against good actors), the maturity framework of CLARITY adopts clear, objective, and easily measurable criteria.

These standards focus on who has control over the underlying blockchain systems and their associated digital assets. This is more consistent with other regulatory frameworks (such as money transfers) and eliminates negative incentives that encourage builders to stop building to avoid being seen as centralized. More importantly, this approach will help legitimate builders thrive—and continue building (rather than being forced to abandon projects)—while making it harder for bad actors to exploit legal ambiguities, including through participation in performative "decentralization theatrics" (rather than true decentralization).

Specifically, the framework of the bill incentivizes decentralization and protects consumers in the following ways:

• Impose more oversight and stricter regulatory burdens during the formation phase of blockchain systems - When there is centralized control, the risks associated with the native digital assets of that blockchain system are most similar to the risks of securities;
• As the project matures, regulatory requirements will decrease—when there is no centralized control, risks are reduced, most similar to the risks associated with commodities.

The legislative efforts made to transition from centralized to decentralized systems, similar to those previously established (see the comparison with FIT21 below), include regulatory obligations applicable to projects within the "maturity" range:

• Mandatory Disclosure — This will increase transparency; and
• Selling Restrictions on Insiders — This can protect early consumers from insiders (such as participating entrepreneurs and investors) who may possess asymmetric information that other consumers do not know.

However, unlike FIT21, CLARITY has established seven objective, measurable criteria to determine when a specific blockchain system is no longer controlled by individuals or a collective group (such as a foundation), thereby ensuring that its native digital assets no longer pose a risk similar to securities. Because this approach is centered on eliminating control, it can protect consumer investors while fully realizing the potential of blockchain technology. Furthermore, since CLARITY adopts measurable (rather than amorphous) criteria, it provides a framework that is easier for regulators to apply and for builders to follow.

In short, this new framework is a significant improvement over the traditional regulatory framework, as securities laws were not designed for assets (such as blockchain systems), since the risk profile of assets can shift from being similar to securities to being similar to commodities.

This new framework has also received widespread support from the industry.

What impact does it have on specific industries like DeFi?

The CLARITY Act provides important protections for decentralized finance (DeFi). Specifically, the Act:

• Exempt DeFi protocols and applications from regulatory requirements for intermediaries in digital goods transactions (such as exchanges and brokers);
• Establish standards for DeFi - To qualify, DeFi systems must not act as intermediaries - ensuring that specific DeFi systems do not reintroduce risks that regulation aims to mitigate.

In addition, the bill will provide the necessary legal clarity for DeFi projects:

• Launch and sell your own native token - these processes used to be fraught with risks and uncertainties;
• Utilizing decentralized governance - avoiding the risk of being classified as centralized.
• Provide self-custody rights – Many people used to do this, but now with this bill, individuals will have "self-custody rights."

CLARITY has created a fair competitive environment for DeFi projects. This also paves the way for integrating the advantages of decentralized finance into a broader financial system, thereby more widely unleashing its true potential for the benefit of consumers.

However, the CLARITY Act is not without its flaws. The bill focuses solely on digital goods and does not encompass other regulated digital assets, such as tokenized securities and derivatives. Although the CLARITY Act exempts DeFi systems from complying with federal intermediary rules, it does not replace state-level regulation—which means the DeFi industry remains susceptible to inconsistent or overly burdensome state-level policies. These gaps should be addressed by the Senate, future legislation, or through coordinated regulatory guidance (such as rule-making by the SEC and CFTC).

Is CLARITY better than the current situation?

Yes; the CLARITY Act has improved the situation because...

……The industry currently lacks regulation. While some may argue that no regulation is better than regulation, the current lack of transparency in regulation provides convenience for criminals and unscrupulous merchants, who exploit this uncertainty to take advantage of consumers. (Not to mention that this may lead to regulatory agencies abusing their power without restraint.) FTX is a typical example of these issues, which not only harmed the entire industry but also harmed thousands of consumers. If we do not take action now, we will open the door to more criminals like the former CEO of FTX.

……The industry lacks transparency. Due to the absence of mandatory disclosure and listing standards, consumers often face the risk of scams and fraud. This lack of transparency has fostered a culture of "gambling" (rather than a casino that focuses more on innovation), leading to the emergence of purely speculative products like memecoins.

……The industry lacks protection. Due to the lack of clear constraints on the regulatory powers of various federal agencies, blockchain projects (especially DeFi projects) remain vulnerable to the excessive regulation common during the previous administration.

……The industry lacks standards. Without standards for decentralization/control, consumers face unknown risks when using blockchain systems. For example, they may believe their assets (including stablecoins) are safe—but if these blockchain systems are controlled by a single entity (which could shut it down directly), they may not be secure. As all industries mature, the establishment of standards becomes increasingly common.

How does the "CLARITY Act" compare to previous legislative achievements, such as the "21st Century Financial Innovation and Technology Act" (also known as FIT21)? The CLARITY Act actually learns from the experiences of FIT21 and improves upon it:

1. It enhances transparency by plugging the loopholes in FIT21, preventing certain legacy projects from evading disclosure. CLARITY provides a framework for legacy projects that are still operational to fulfill their disclosure obligations.

2. It provides stronger consumer protection by making it more difficult for insiders to exploit information asymmetry. For example, CLARITY strictly limits project insiders from selling assets before the project matures (i.e., while they still control the project).

3. Its maturity framework provides a more principled, control-based decentralized testing, significantly improving the FIT21 fuzzy approach. The framework is also more precise, as CLARITY proposes seven objectively measurable criteria to assess the maturity of blockchain systems.

4. It improves regulatory oversight and provides regulators with greater flexibility, which will help ensure that the regulatory framework evolves and scales with the maturity of the industry.

How does the CLARITY Act align with the recently passed GENIUS Act?

The GENIUS Act represents a key step towards the modernization of our financial system. The House passed this important legislation with an overwhelming majority (308 votes in favor, 122 votes against, including 102 Democrats supporting it), making history. However, the legislation on stablecoins has significantly increased the necessity for broader market structure legislation like the CLARITY Act.

Why? Because GENIUS will accelerate the adoption of stablecoins, thereby driving more financial activities to migrate to the blockchain, enhancing reliance on the blockchain, and enabling broader payment and commercial activities. This is already happening, as ubiquitous payment processors, traditional financial institutions, established payment networks, and other entities are increasingly accepting and adopting stablecoins.

However, the current stablecoin legislation does not regulate the blockchain for stablecoin asset circulation—it does not require these tracks to be secure, decentralized, or transparently managed. This gap exposes consumers and even the entire economy to new systemic risks.

With the GENIUS Act now signed into law, the demand for CLARITY has become more urgent.

The CLARITY Act provides necessary standards and oversight to ensure that the infrastructure supporting stablecoins (underlying blockchain, protocols, and other tools) meets safety, transparency, and control standards. Its objective, measurable requirements for mature blockchain systems also better assist entrepreneurs in clarifying how to meet these standards.

Without the complementary protections of the Genius Act and the Clarity Act, the adoption of stablecoins may accelerate the use of unregulated, opaque, and even adversarial infrastructures. The passage of the Clarity Act will ensure that stablecoins operate on a secure network, further protecting consumers, reducing financial risks, and solidifying the dollar's strong position and leadership in the next generation of financial systems.

What will happen next?

With the CLARITY Act passing in the U.S. House of Representatives, it will be sent to the Senate. The Senate Banking Committee and the Agriculture Committee may choose whether to take up the bill, modify it through their respective amendment processes, and then submit it for a vote in the full Senate.

However, it is more likely that a group of bipartisan senators will propose a separate Senate version of the cryptocurrency market structure bill, which may be similar to the CLARITY Act in many ways. The Senate Banking Committee and the Agriculture Committee will then review the bill through their respective procedures, and if approved, it will be submitted to the Senate for a vote.

If both chambers of Congress pass their respective bills, the House of Representatives and the Senate will need to reconcile any differences—whether through informal negotiation procedures or through more formal conference committees—after which each chamber will vote on the final compromise version.

When is all this likely to happen? The main leaders of the House and Senate have set a goal to deliver the market structure bill to the President for signing by the end of September.

The CLARITY Act received 216 Republican votes and 78 Democratic votes, continuing the bipartisan momentum established by the FIT21 Act (which passed the House with 71 Democratic votes). The Act is a comprehensive improvement over the FIT21 Act, enhancing consumer protection, clarifying standards for decentralization, and aligning more closely with existing regulatory frameworks.

The passage of the CLARITY Act will ensure that the United States continues to maintain its global leadership in blockchain infrastructure, benefiting developers and consumers. As a serious, thoughtful, and bipartisan attempt, the CLARITY Act aims to build an effective regulatory framework for cryptocurrency in the United States, striking a balance between innovation and regulation. It provides Congress with an opportunity to protect consumer rights while supporting the infrastructure development of the digital economy, creating jobs and opportunities, representing the next significant milestone in the field of computational innovation—its importance is on par with that of previous milestones such as personal computers, cloud computing, and mobile computing.

We are at a critical moment.